IFRS 16: a “big bang” in leasing?

In the wake of its publication, the IFRS 16 standard has caused a ripple among financial departments who expect to see major changes, not only in finances and accounting, but also in terms of data processing. Reporting & Consolidation Expert Adeline Arana gives us a glimpse of what’s new and explains the challenges of the new regulation.

Consolidation

IFRS 16

Lease

Published on 13 January 2016, the IFRS 16 standard for leases will only enter into force on 1 January 2019.

The standard, which heralds a small “revolution” in the accounting world, will require companies to report both operating and finance leases on their balance sheet.

What will change in terms of accounting and finance?

For lessees, the main difference is the fact that debts ensuing from a lease will be recognized as liabilities, while the right to use the leased item will be recognized as an asset. For lessors however, the new standard is in line with IAS 17 in that it differentiates between operating leases and finance leases on the balance sheet.

Note that an exception is made under IFRS 16 for leases with a term of 12 months or less and for small items (under a certain value).

The recently published standard therefore gives a new definition to leases by requiring them to identify an asset either explicitly or implicitly in the contract. Lessees will moreover have control of the right to use the leased item to the extent that they will be able to benefit from almost all the advantages of the asset and decide in what way and for what purpose they want to use it.

As for the financial impact, the new standard will first of all affect the balance sheet, as it will lead to an increase in assets that are capitalized as well as in loans that are booked as liabilities. It will also affect the income statement, as lease expenses will be replaced by higher depreciation charges and an interest burden.

What will the main challenges for financial departments be?

The new IFRS 16 standard will bring various kinds of challenges for financial departments. First of all, they will have to think about how to classify all the leases in a company. Even though IFRS 16 does not enter into force until 2019, we believe it necessary to analyze all contracts beforehand in order to know how much and what type of data will have to be processed.

The new standard also implies new business challenges for financial departments that will have to keep making new estimates depending on the nature and term of a lease, which could affect the reliability of financial forecasts.

Lastly, it also holds challenges for information systems and data management.

Data management, estimation strategy and compliance with Invoke FAS

The IFRS 16 standard by its very nature will oblige companies to apply greater discipline in the management of leases and processing of data resulting from the contracts in their information systems.

Invoke FAS, a modular platform for unified reporting on a company-wide scale, will give financial departments and accountants a simpler way to inventory their leases using data collection tables for each subsidiary, which will automatically be integrated in the consolidated accounts. This will facilitate the management and processing of all lease-related data. Calculating depreciation charges, borrowing and interest rate update charts, automatic generation of adjustment entries, etc. – Invoke FAS enables you to carry out all these complex operations in a few clicks.

It also gives you a strategic view of leases by issuing a summary of amortization and loan repayment charts, as well as simulations that could play a key role in financial decisions.

Lastly, Invoke FAS offers you a modular interface that allows you both to collect data from upstream systems, and automatically feed it into your consolidated accounts.

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How does one deal with the impacts of the new IFRS 16 regulation? How does one prepare for its entry into force considering all the challenges that it brings to the fore?Adeline Arana gives some answers and explains.